This article was published on 6 September 2005. Some information may be out of date.

Share pickers respond to my doubts

Even as I typed it, I thought a certain sentence in my last column was bound to cause trouble.

“Lots of research,” I wrote, “shows that an individual investor who researches companies doesn’t tend to do any better than someone who chooses shares at random.”

Sure enough, a man who describes himself as “a paid-up member of the share pickers guild” emailed me.

“Members of the guild are commercial news junkies,” he says. “They don’t do anything else but wade through mountains of useless info to find the nuggets.

“I can name a dozen public figures who are highly successful in beating the market regularly by a wide margin. You probably know these names yourself.” Sorry, but I don’t know any.

“Personally, I have no trouble in outperforming by a substantial margin not just any random picker, not just the market, but also professional fund managers, over the long period, thanks to research, patience and perseverance.

“Same applies to other members of the guild, probably because we are not aware of the lots of research you quote.”

This is not the first time people have made this point, and I don’t dismiss this lightly.

As I explained in the last column, my statement is based on market efficiency. “Whenever a company issues new positive information, big institutions buy its shares in seconds. That demand pushes up prices, so by the time individuals buy, the good news is already incorporated in the price.

“The same with bad news. Institutions sell fast, lowering the price that individuals can get when they decide to sell.”

I learnt about market efficiency at university. It convinced me enough that since then I have stuck with the equivalent of buying shares at random — investing in index funds, which perform much the same as the whole share market.

Some people scoff at university learning. The letter writer, for example, seems to take pride in being unaware of research.

But those who do know the research know that it’s not pie-in-the-sky. The researchers look at heaps of real data, mainly on the managers who run large funds.

Our correspondent says he easily beats professional fund managers. So why doesn’t he go and work for one? Given that he wades through mountains of info, he might as well get paid to do it. And if he’s that good, I’m sure they would pay him millions.

Truth is, it’s quite possible that luck helps him to beat the market and the fund managers.

In any given year, about half the share pickers are going to do better than average. Of course you don’t get the same people outperforming year after year. Still, over say ten years, a few people will keep being luckier than average.

Having said all that, I admit that market efficiency may not work all that well in New Zealand for shares in smaller companies.

They have too few shares for the big financial institutions to take an interest. A small investor, therefore, might discover undervalued shares that the market hasn’t noticed.

For those who are willing to put the work into discovering such gems, good on you. But you certainly won’t get it right every time.

And I invite you to keep track of all the time you put into your research. Are you as well rewarded for that time as you would be doing another job and simply investing in an index fund?

Perhaps you do it because you enjoy it. Fair enough.

But I suspect most readers of this column couldn’t be bothered putting that much effort into something that might or might not be rewarding. The writer certainly isn’t!

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.